Hedge Funds and Asset-Market Dynamics

Once a cottage industry that catered only to high net-worth investors and sophisticated institutions, the hedge-fund industry has grown rapidly over the past two decades and is now a significant part of the investment mainstream. Although they offer investors unique investment opportunities that have yielded significant rewards and diversification benefits historically, hedge funds also contain more complex risk exposures than those of traditional investments. Two of the most misleading and potentially dangerous myths about hedge funds are: (1) they are all the same, comprising a single homogeneous asset class; and (2) they are all different, with returns that have little pairwise correlation. In this research program, we dispel these myths by developing more sophisticated risk analytics and conducting extensive empirical research to document their risk/reward characteristics across time and over various market environments.